Don't Walk the Plank: Risk Management for the 21st Century
What does risk management have to do with walking the plank? Risk is inherent in the real estate business and that risk creates business opportunities for local realty trade groups. Matt Farmer, an attorney in Salem, OR, spoke with REALTOR Association Executives recently in San Diego.
“I think that helping brokers with a new generation of risk management problems is a tremendous business opportunity for you,” he told them. “We have to understand what REALTOR organizations really are and how they operate and see what kinds of risks our members face so that we can put these two things together.”
Farmer presented a challenge: What is the definition of a real estate association?
A. Association of people united by some common fraternal bond or social aim?B. Association of people or companies in a particular business or trade, organized to promote their common interests?C. Both of the above?D. None of the above?
(The definitions are derived from the U.S. Internal Revenue Service Code for not-for-profit organizations.)
Farmer said that “B” is the most commonly accepted definition for a REALTOR organization, but that “C” may be a better answer choice: “In some small boards the same half dozen people take turns taking leadership positions because nobody else will do it. Even in large boards and in state associations there is a tendency to recycle the same people. The systems are built to encourage that … In Oregon there are 20,000 REALTORS and we see about the same 300 - 350 people all the time.”
Farmer said that professionals are too busy these days to spend time in fraternal organizations and membership in fraternal groups like Elks and Rotary is declining. REALTOR organizations that are run as a fraternal model are likely to see similar membership decline, he cautioned.
REALTOR Common Interests
“REALTOR membership has been climbing steadily for more than a decade,” Farmer said. “The something ‘right’ associations are doing is promoting common interests. That is what drives membership.”
What drives REALTOR association membership? Why do people become REALTORS?
Legislation – Farmer said that REALTORS work with lobbyists to promote the general good, and the good that is created falls equally to all parties, whether or not they participate in the lobbying process. Legislation is a common interest but it is not an engine to drive membership.
Business Ethics – The REALTOR Code of Ethics is a common interest of members but it is not an engine that drives membership.
MLS – The multiple listing service is a central, critical business tool, said Farmer, but there are problems with it as a vehicle to drive membership to an association. In some places, MLS membership is not tied to REALTOR association membership. Farmer pointed to an MLS in Oregon owned by non-members of NAR and said that 95% plus members of that MLS are REALTORS.
“In some states where MLS members do not have to be REALTORS, they often fail to hit 50%,” he noted. “It might be fair to say that if people did not see the MLS as business opportunity for REALTOR organizations, half of us would not be here.”
Farmer told association executive that a pending antitrust lawsuit filed by the U.S. Dept. of Justice against the National Assn. of REALTORS poses a threat to association membership: “It’s like waiting for the shoe to drop. You are one lawsuit away from losing half your members if you rely on your MLS to bribe memberships above 90% and you have all your eggs in one basket.”
There are other issues that spell trouble for MLSs, he said. “Nobody can quite put their finger on the malaise. We just know that something is wrong and that it has to do with digital information exchanges. We just know that there are problems with MLSs and how they operate.”
He pointed to the southwestern coast of Oregon where there is a string of towns. REALTORS in that area ran a small MLS for many years. A large regional MLS incorporated them and the system ran smoothly for years. Suddenly another listing site appeared on the Oregon coast that was not REALTOR owned. The new site is not technically a multiple listing service, but it is run as a multiple listing service because brokers list their properties on this site. The site is run by one person out of a trailer.
“What does this tell you about MLS? It’s cheap!” Farmer declared. He said that MLS used to be a great entry barrier that required intense labor, organization, and capital. “Now there is a guy with a computer degree and an $800 computer who is matching MLS services in southwest Oregon,” he said.
MLSs are still the engine that drive association membership, he said, but issues remain and the future of the MLS is uncertain.
Standard Forms – Paper forms offered excellent non-dues income for associations for many years, but that is changing in the digital age. Prices are trending down and digital forms will remain a good business for associations, Farmer said, but it will not be a growth business.
Risk Management is an excellent business opportunity because it drives legislation and new forms. “Risk management is there as a money maker but we are not capitalizing on it,” he said. “Your members have risks and that creates a business opportunity.”
Capitalizing on Risk Management
Many real estate trade associations offer “sales era” risk management tools. These include classroom style education, boilerplate forms contracts, liability waivers, and general disclosures. Farmer asserts that the “sales” era of real estate ended 20 years ago. “Sales was what the business was about and sales has its own set of risk management tools,” he said.
“In that kind of business, where everyone represents the seller your risk is half what is is in an industry where buyers are represented … at the end of a real estate transaction, the buyer has a house and the seller has a pocket full of money. Which one is more likely to have defects?”
Classroom education is good, he said, except that it is the same people who attend the classes each time and the people who need it most are absent.
Forms have been under pressure because buyer forms are hard to distinguish from seller forms in a real estate transaction.
“The risk in a sales industry is misrepresentation. You can teach an agent how to spot problems, how to disclose problems, and how to protect himself with waivers, but the sales era ended 20 years ago,” Farmer stated.
Risk Management Tools for the 21st Century
“A professional services industry needs professional service tools,” he said, “tools desisgned for professional malpractice and not professional misrepresentation.”
New Information Tools is the first level of tools that Farmer recommends: “The electronic revolution and the digital age impacts us here. The techies have a wonderful saying for this, ‘Information wants to be free’.”
Information, to be a direct value, has to be let go, according to Farmer. Once done, communication is simple and inexpensive via the Internet, and it tends to be free. Value is returned in a variety of ways. The value is the currency of the client's perception of you as an expert, a resource for information.
The information that used to be the basis of the industry was data about properties for sale. “How hard is it now for a buyer to find real estate?” he asked association execs. Property listing data does not have the value it once had. Agents and brokers must have additional valuable information to share with buyers and sellers. They have to know about neighborhoods, how to negotiate, and what can go wrong in a real estate transaction.
Information for real estate agents to share with clients includes information in agent tools: buyer/seller advisories, engagement letters, standard follow-up letters.
Engagement Letters – These are not commonly used in the real estate industry. They are used more often in accounting, engineering, and legal offices. When you have a client you send them a letter, “Glad to have you as a client. Here is what we are going to do for you. Here is what we don’t do. Here are some things you should do. I look forward to working with you.”
“Engagement letters define the scope of professional representation. Nobody knows what a buyer’s agent does. With limited service representation it’s not even clear what the listing agent really does,” remarked Farmer.
Standard Client Information Letters – These are letters that deal with particular issues. They can be standardized and bundled to meet the needs of the local real estate market.
Telephone Seminars – Pennsylvania Assn. of REALTORS is the trendsetter in telephone seminars for members. There are companies that set up telephone seminars. An association assigns a presenter to the call and people call in a big pool. They can hear the presenter but they cannot hear each other. For a $10 fee, for instance, a broker can register and listen to the presentation at a speaker phone with ten agents.
Telephone seminars are good tools to offer risk management counseling to association members.
Podcasts – Associations can record their telephone seminars and convert the audio files to mp3 files, and make them available on their web sites. This delivery method lets agents and brokers access the information at their leisure.
Risk Assessment Blog – “Blogs and hotlines go together like peas and carrots,” said Farmer. We think of legal hotlines as presenting information to single members. Blogs offer a way to reach a wider audience. Montana Assn. of REALTORS offers a risk assessment blog to its members behind password protected gateway.
Computer Based Risk Management Programs – These are tools that resemble Windows based help programs that can offer information on many topics. Associations can plug in checklists, forms, and articles.
Client Checklists – “No airline pilot would dream of taking off without going through a checklist,” said Farmer. REALTORS needs checklists for listings, sales transactions, advertising, and showings.
Risk Allocation Clauses offer the final step in a transition from sales attitude to professional service attitude.
Sales Attitude:, We disclaim and we disclose.
A sales strategy is a risk shifting strategy. It says, “Look, there is risk to this deal and we don’t care because you are taking it.”
Professional Services Attitude: We handle.
A risk allocation strategy says, “There is an identified risk in this transaction. Knowing that risk, somebody will move forward and they will base making that move forward based upon negotiating purchase price and known risk.”
“If an association wants to provide tools to manage risk in the 21st century, it has a big education job and a big opportunity to fuel common interests,” concluded Farmer.
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